Leaving Real Estate to Your Children

It's common for siblings to inherit real estate—the family house, or maybe a vacation cottage—together. Parents see an even split as the fairest, easiest way to leave their property, but often don't think through the possible consequences, both financial and emotional.

The basic issue is that you can't easily split real estate, like you can a bank account. And siblings may have very different ideas about what should be done with the property.

Problems Down the Road

Let's take a very common situation: a will that leaves "all my property to my children, Vanessa, Jennifer, and Jeremy, in equal shares." If there's real estate in the property that passes through that will, then the children are eventually going to have some decisions to make.

To Sell or Not to Sell?

If all the siblings are both financially comfortable, with homes of their own, they have several good options:

• They could sell the house and split the proceeds.
• One could buy out the others and keep the house, either to live in or as an investment.
• They could keep the house together and rent it out, sharing expenses and income.

All they have to do is decide what they want. If one sibling wants to hang on to the house for economic or emotional reasons, he or she can buy out the others, and everyone's happy.

If, however, one sibling is struggling financially while the others aren't, the situation is different, and the range of available options shrinks. Of course, the siblings could still sell the house and split the money equally.

But if they don't agree on that course, things get complicated. Say Vanessa is out of work and wants to quickly sell the property, so she'll get some much-needed cash (and end her obligation to chip in for local property taxes and maintenance costs). But Jeremy and Jennifer want to keep the place for at least a few years, hoping housing prices will go up. Or what if Vanessa needs a place to live and wants to move into the house, but can't afford to pay market rent, much less buy out her siblings' shares? There are no easy answers to these questions, which raise emotional as well as financial issues among family members.

Ongoing Expenses: Maintenance and Taxes

Even siblings who amicably agree to keep a piece of real estate may run into problems down the road. Their financial situations may change, especially if they go through bankruptcy or a divorce. Either of those events could force a sale of the property. And eventually, decisions will have to be made about maintenance and repairs—not the run-of-the-mill expenses, but big-ticket items like a new roof or foundation. Siblings may not always agree about the need to invest thousands in the house.

There may also be day-to-day management issues. If the house is being rented out, who screens tenants, collects the rent, and calls the plumber when there's a backed-up sink on Sunday morning?

Finally, at some point the siblings will need to decide how the house fits into their own estate planning. Should it be passed to the next generation, and if so, what's the best way to handle that? Co-ownership among cousins can be even more problematic than among siblings.

Avoiding Sibling Squabbles

Parents who want to avoid sowing the seeds of discord among their children can take steps, when they do their estate planning, to reduce the likelihood of conflict.

Air the issues. Probably the best single thing to do is discuss matters with your adult offspring. You might be surprised by what you find out—maybe you think your daughter would love to move into your house, when actually it just wouldn't suit her family's needs. Leaving the house to your son and other property to your daughter might be a better solution. A conversation is also the best way to head off surprises, which are a main cause of hurt feelings after a death. If your children know why you made your estate plan, they're less likely to be angry (at you or each other) when the time comes.

Talk to an estate planning lawyer about your goals. Certain estate planning strategies can also help when you're planning for real estate. For example, if you want to keep a house in the family, you might want to create a trust that will provide money to pay for ongoing costs such as property taxes and maintenance. An experienced lawyer can advise you.